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September 18, 2013

The War on Patent Trolls -- Congress Prepares for Battle

In
case it was not clear that Congress is serious about combatting the perceived
problem of "patent trolls," Sen. Patrick Leahy (Vermont) and Sen.
Mike Lee (Utah) published an opinion piece this week on the POLITICO.com
website, which is now entitled "America's Patent Problem." Both Senators are members of the Senate
Judiciary Committee, chaired by Sen. Leahy (at right), the committee which has
jurisdiction over patents, copyrights, and trademarks. The article started from the premise that there
are patent holders that are abusing the system, and that this abuse has resulted
in a drag on the economy. The example of
"patent misuse" that the article highlighted is a patent holder that
insists that Wi-Fi routers infringe its patents. Sen. Leahy and Sen. Lee (below) took the position
that, even if this patent holder's infringement allegations are legitimate, it
should only be allowed to sue the companies that make and sell the routers, not
the small businesses that are using these routers. But, the small business examples to which the
authors pointed included "hotels or small coffee shops" -- entities
which others have referred to as "end-users" of the technology. It is hard to believe, though, that these
small businesses are using these routers for non-commercial purposes. Even if the "hotels and coffee shops"
don't charge their customers for the use of the Wi-Fi, it is almost certain
that they seek to attract customers with the service. More importantly, a patent holder's rights
are not limited to preventing the making and selling of a patented
product. Instead, 35
U.S.C. § 271(a)
provides that "whoever without authority makes, uses, offers to
sell, or sells any patented invention, within the United States or imports into
the United States any patented invention during the term of the patent
therefor, infringes the patent" (emphasis added). Thus, it is unclear what the justification is
for excluding such "end-users" in this case, especially when the "end-users"
is more likely than not using this technology for commercial purposes. The Senators did not provide an answer.

To
be fair, we are not taking any position on the merits of the case to which this
example refers. Indeed, the Senators
themselves did not provide any specifics; for example, no parties or patent
numbers are cited. Instead, Senators Leahy
and Lee focused on the fact that certain patent holders are targeting small
businesses for the sole reason that the cost of settling can be far less than
defending against a lawsuit. This may be
true. However, it is difficult to
distinguish between such alleged tactics and the licensing efforts of "legitimate
patent holders." Instead, the
authors concluded (without much explanation) that "this misuse of the
patent system" does not belong to "the patent system provided for in
our Constitution."

But
is this true? Not if an article that
appeared on the Forbes website on Tuesday is to be believed. Former undersecretary of commerce and
director of the U.S Patent and Trademark Office Jon Dudas (at right), and author of the
book "Rembrandts in the Attic," David Kline, wrote a piece entitled "Thank
the Founding Fathers for the Open Market in Patents." Contrary to the sentiment expressed by
Senators Leahy and Lee, and almost every report in the mainstream press, Mr.
Dudas and Mr. Kline (below) explained that the founding fathers not only anticipated
non-practicing entities, they encouraged them. Of course, these are the same founding fathers that provided for a
patent system in the Constitution, and helped to draft that first patent
act. The authors pointed out that the
young American economy needed a kick-start because, at that time, "the
U.S. had a lower standard of living than many South American countries." The founders looked to the British patent
system, but according to Bowdoin College historian Zorina Khan, this system had
high fees ("11 times the per capita income of the average citizen")
and a working requirement (they had to practice the invention). The article continued by citing the work of
historians Naomi Lamoreaux from Yale and the late Kenneth Sokoloff of UCLA, who
explained that the founders wanted to design a system that would "stimulate
the inventive genius and entrepreneurial energy of the common man," even if
such individuals could not commercialize their own inventions. They accomplished this by instituting fees
much lower than in Britain, not imposing a
working requirement, and by
expressly allowing the sale and licensing of patent rights. The article continued to cite the work of
professors Lamoreaux and Sokoloff, who explained that new intermediaries (think
non-practicing entities) "'lowered the transaction costs and improved the
efficiency' of the trade in and commercialization of patented technology." Mr. Dudas and Mr. Kline concluded that this
system, which is currently embodied by universities and industry NPEs, has
sparked many new products and businesses over years.

Mr.
Dudas and Mr. Kline warned, therefore, that not all non-practicing entities
should be lumped together into the designation of "Patent Troll." Nevertheless, this appears to be exactly what
Congress is doing. Senators Leahy and
Lee explained that their committee is working "on a bipartisan basis"
to address this so-called Patent Troll problem. In addition, they are coordinating with the Representative Bob
Goodlatte, chairman of the House Judiciary Committee. The stated goal for this legislation is to "make
it harder for bad actors to succeed, while preserving what has made America's
patent system great." Of course,
that is easier said than done, and the difficulty is narrowly crafting such
legislation to specifically address the perceived problem without also
ensnaring all of the so-call "legitimate patent holders," or without introducing
unexpected negative consequences for the patent system as a whole. Some of the suggested legislation includes
increasing transparency of patent ownership, protecting the end-users when the
manufacturers should be the real defendants, and improving the process for
reviewing patents at the Patent Office (although it is unclear why Sen. Leahy
did not mention the post-issuance review procedures of the Leahy-Smith America
Invents Act in his article). We have
previously reported on some of the proposed legislation, and we will continue
monitor and report on the activity of Congress. It is likely that with so much momentum and apparent public support, there
will probably be some sort of bill passed in the next year or so. We can only hope that in doing so, Congress
does not toss out the proverbial baby with the bathwater.

For additional information regarding this and other related topics, please see:

Comments

The profession doesn't have a patent troll problem. It has a litigation cost and responsibility problem. As usual, Washington is good at finding problems - but the framing is typically off and the solutions worse. If these senators want to help deal with this problem, adopt the English Rule for patents. But I suspect that will be unacceptable to the 800 lb gorilla law firms that dominate the profession, not to mention the litigation bar, a major Democrat Party interest group. So at best we will be left with another hairsplitting complex solution that, like most Washington products these days, will make litigation even more expensive.

Being on the same side of a patent issue as Jon Dudas makes me feel queasy; seeing Leahy trying to "fix" the patent system (again) makes me nauseous. I see this heading in the same direction as the AIA - favoring large, established companies over small operations. They'll shut down IV and WARF, but Apple, MS and IBM will still be free to enforce their junk patents because they ostensibly actually make stuff.

"Congress is serious about combatting the perceived problem of 'patent trolls.'"

Andrew,

You characterized the so-called "patent troll" problem correctly: a "perceived" problem. Leahy and his ilk have already burdened us with the AIA (Abominable Inane Act). We don't need more nonsense like this from these inept Congressional lackeys.